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Could Pound US Dollar Exchange Rate Rally on UK Inflation Data?

Pound Sterling Currency Forecast

Ahead of the latest UK inflation figures the Pound (GBP) has struggled to find any particular support against rivals.

Forecasts point towards a further increase in domestic inflationary pressure, which would bode badly for wage pressures and consumer spending.

If the consumer price index rises 2.1% on the year as expected, though, the Pound US Dollar exchange rate could still rally.

While the general outlook of the Bank of England (BoE) remained neutral at its March meeting markets maintain hope of a greater hawkish bias.

Despite its pledge to look through some degree of post-referendum inflation a stronger showing here could encourage the BoE to consider a shift in outlook.

The BoE’s meeting minutes did not suggest that the Monetary Policy Committee (MPC) is likely to begin tightening policy in the near future, though.

With prominent hawk Kristin Forbes due to depart the Bank in June the odds of interest rates rising from their historic low any time soon are limited.

As consumer spending has been the major driver of growth in the wake of the Brexit vote a sharper increase in inflation would not be entirely positive for the domestic economy either.

If the latest public sector net borrowing figure indicates a further build-up in government debt, meanwhile, the GBP USD exchange rate could come under greater pressure.

The US Dollar (USD) has struggled to hold onto its stronger footing, as markets remain disappointed by the more cautious view on policy normalisation expressed by the Federal Reserve.

Policymakers’ updated forecasts signalled that the Fed foresees two further rate hikes over the course of the year.

This was a little more dovish than the view of investors, who had hoped to see indications of a more aggressive pace of monetary tightening.

As analysts at BBH noted:

‘Following the FOMC meeting, the market downgraded the chances of a follow-up hike in June.  Judging by the Fed Funds futures strip, about one in nine think the Fed will not hike again.  About a third thinks there may be one more hike, and one third accepts the dots that indicate two hikes may be appropriate before the end of the year.’

While domestic data has remained encouraging, with a better-than-expected University of Michigan consumer confidence index, the upside potential of the ‘Greenback’ has thus remained limited.

Commentary from various members of the Federal Open Market Committee (FOMC) could soften the GBP USD exchange rate in the coming week.

If Fed Chair Janet Yellen takes a more hawkish tone the US Dollar may find a fresh rallying point, boosting the odds of another rate hike coming sooner rather than later.